The Greek parliament’s approval of fresh austerity measures despite violent protests in Athens opened the door for a brighter disposition in markets and this, coupled with stronger-than-expected earnings and growth prospects, may push stocks upwards, according to analysts.
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Finance ministers in the euro zone are due to meet on Wednesday to discuss the austerity measures that Greece has promised to undertake in return for a second bailout from the European Union and the International Monetary Fund. Some observers say that the sacrifices made by Greek politicians were so big that EU leaders will have to approve the package.
"Lawmakers in Greece have chosen to go for it knowing the hardship and burden the Greeks must bear for the indefinite future. It is difficult to imagine that Greece will not now be granted access to a second bailout. The betting must be that it will," Mike Lenhoff, chief strategist at investment management firm Brewin Dolphin, wrote in a research note.
Bond and stock markets are likely to read this as "another positive development in helping to diminish further the risk of contagion and subduing the euro zone’s financial crisis" while for banks it will likely be seen as a green light for carry trades in the single currency area's higher yielding bond markets, such as Spain and Italy, according to Lenhoff.
Banks will be encouraged to borrow "big time" at the European Central Bank's long-term refinancing operation (LTRO) at the end of this month, he added, and "in helping to underpin the 'high yielders' in debt markets, this latest development should also help push the risk trade into equity markets."
A "solid" earnings season and a "shorter and shallower" recession for the euro zone also improve the prospects for markets, according to analysts at HSBC and Credit Suisse.
"The results season is proving to be solid rather than spectacular but there is nothing here to strike real fear into investors' hearts," HSBC analysts wrote.
Earnings Optimism
They pointed out that in the U.S., 61 percent of the companies that have reported results so far beat estimates and 29 percent missed, a bit weaker than seen in recent years but in line with the S&P 500's long-run average in this respect.
In Europe, 53 percent of companies beat estimates and 36 percent missed, "a modest improvement" on the third quarter according to HSBC, which noted however that only a third of companies have released results so far.
Analysts have been quick to downgrade earnings expectations for 2012 in Europe, to ensure they do not repeat the 2009 mistake of underestimating the weakness of the results, the HSBC analysts wrote.
The consensus is now that earnings per share in Europe will grow by just 7 percent and HSBC's forecast is more pessimistic, at 4 percent.
"A closer look at the results also tells us that sales growth is proving resilient in both regions. Excluding the volatile financials we find that S&P 500 sales growth [in the fourth quarter from the year-ago period] is running at +8% with the comparable figure for MSCI Europe standing at +5%," the analysts said.
Fears of a prolonged global recession and a long, painful one in the euro zone, which were rife a couple of months ago, are proving unfounded, some analysts say now.
"Cyclical indicators suggest that the recession we expected over the turn of the year will be shorter and shallower than we forecast. So much so that it is unlikely to constitute a recession at the euro area level," analysts at Credit Suisse wrote.
They expect gross domestic product for the euro zone to be unchanged for this year, compared with their previous forecast of a 0.5 percent contraction and predict that the economy shrank by just 0.4 percent in the fourth quarter of 2011.
If confirmed by the data that is to be released on Wednesday, such a mild outcome would be "a positive surprise" which may reflect resilience in the global economy, according to the Credit Suisse research note.
"In particular it seems that the corporate sector has been less vulnerable to shocks from the financial sector than was the case in 2008-09," they wrote. "And the continued expansion of the global economy has also been supportive of euro area growth."